Radical way to lose college loan debt

Conventional wisdom has it that student loans, whether federal or private, are impossible to walk away from. However, recent research shows that's not the case.

Anya Kamenetz

Conventional wisdom has it that student loans, whether federal or private, are impossible to walk away from. However, recent research shows that's not the case.

Jason Iuliano, a Princeton political science Ph.D. student who also has a degree from Harvard Law School, did a comprehensive search of bankruptcy cases in which borrowers sought to discharge student loans. He found that in four out of 10 cases, judges erased all or part of the debt. Here's the rub: Only 0.1 percent of student loan borrowers who declared bankruptcy actually tried to get their loans forgiven!

If you or a family member are struggling under financial pressures and have student loan debts that you can't pay, you should first pursue a break from payments, known as deferment or forbearance, or an income-linked repayment plan such as Pay as You Earn, which I discussed in a previous column. However, here's what you need to know about taking the last resort to get rid of your debts.

Student loans aren't dischargeable under normal bankruptcy proceedings. You have to file a separate suit, called an adversary proceeding, that is like a mini-trial within a bankruptcy case.

Most courts use something called the Brunner test to decide if your student debts cause you "undue hardship," which is necessary for getting all or part of the loans written off. The Brunner test requires proving three things in your adversary petition: first, that you cannot maintain a minimal standard of living for yourself and your dependents while making your loan payments; second, that this situation is likely to persist (sometimes called the "certainty of hopelessness"); and third, that you have made a good-faith effort to repay your loans.

One attorney I spoke with, Steve Richardson of Woodbury, N.J., said that in his experience, meeting the three conditions of this test is difficult - or, at least, people who have money to pay an attorney are rarely in such dire straits. However, in the cases Iuliano looked at, those with a chronic medical condition, a history of unemployment, a low income in the year leading up to filing bankruptcy and who had been in repayment on their loans for several years were more likely to meet the Brunner test and get their loans forgiven. He also found that whether you have a lawyer did not affect your chances of success. "Some judges - not all - are more forgiving of pro se plaintiffs," he said, referring to people who represent themselves.

Most of the cases Iuliano looked at involved federal student loans. Typically, the lender, like Sallie Mae, offered the borrower a settlement out of court. He believes that if more people were aware of the adversary proceeding option, there would be far more cases of getting federal loans forgiven.

If you have private (sometimes called "alternative") student loans, Richardson has a final piece of advice. Private lenders are usually pretty unwilling to negotiate. "You have two choices: pay or not pay," he said. And the loans, like federal loans, are not discharged in bankruptcy. However, if you really can't pay, the lender will have to take you to court and get a judgment in order to collect. After a few years, if the bank doesn't take the time to pursue you, the statute of limitations on the unpaid debt will run out. And seven years after you first go into default, the incident should be expunged from your credit report.

In no way is this a recommended course of action, but if you truly have no other choice, it's good to know that your life doesn't have to be over because of an ill-considered student loan.